Annual Turnover Meaning
Annual Turnover is primarily referred as the yearly sales or yearly receipts of a profession, however in finance, an annual turnover is commonly referred by mutual funds and exchange-traded funds (ETF) which measures its annual investment holdings that determine health and activity levels of the fund and can also help in comparing it with preceding years or with competitors.
Annual Turnover Formula
It is a very simple term which includes the following:
Annual Turnover Formula = Total Sales of the Trading Company or
Total Production of a Manufacturing Company or
Total Investments held by Mutual Funds, Exchange-Traded Funds, etc. or
Gross Receipts of a Profession During the Particular Year.
Example of Annual Turnover Calculation
To explain the term, let us consider a business. Suppose a trader of clothing items sells a product at $5. Now monthly the trader on average sells 1,000 products.
Calculation of Monthly Turnover of Trader
- Thus monthly the trader earns $5,000 ($5 * 1,000).
Calculation of Annual Turnover of Trader
- = 12*$5000
- = $60,000
Thus the annual turnover of the trader is $60,000.
It shall be noted that the annual turnover figure is the sales figure before deducting the purchase, direct expenses as well as before adding non-operating incomes and other indirect incomes. Thus it is a gross figure.
The different advantages are as follows:
- It is an indicator of an entity’s earning strength. It takes into consideration total earnings purely e based on the quoted selling price and a number of products sold do the annual turnover clearly indicates the market strength of a company and image of such company among the customers.
- It is a periodic amount showing the turnover over the financial year or the calendar as the case may be doing it is a uniform figure and dose uniformity can be maintained for various purposes in the business.
- The annual turnover figure helps in comparison. Since it is a periodic figure annual turnover figure can be compared by a company with preceding financial year or calendar year as the case may be or it can be compared with the annual turnover of another product for the same financial year calendar as the case may be.
- An annual turnover figure can also be used for maintaining competitiveness among the entities. This figure of a particular company of a particular year can be compared with the same product of another company for the same here and steps should be taken to match the annual turnover with the competitive firm or to exceed the same.
- The net profit figure of any company is the amount obtained after deducting various expenses both direct and indirect as well as adding indirect and nonoperating incomes to the annual turnover figure. However, it can be seen that the net profit figure does not show the correct picture to the entity and maybe sometimes misleading.
- Sometimes the company earns abnormal indirect income like speculative profit, while the main business of the company may be of some other product. Thus the net profit might be very high, while this doesn’t show the correct picture. Thus it shows the correct picture of how much the company has set a market base.
Though in the literal sense, the term annual turnover might not be a criticizing topic, however, there are some particular demerits of taking the turnover figures for decision-making purposes.
- Such demerits firstly include, it may so happen that the company sells enormous products every, crossing the mark of various competitors. However, the total purchase price added to total expenses might increase the total turnover.
- Further, there increases rigidity while taking an annual figure. In a seasonal nature firm, annual turnover might not solve the purpose of showing the correct picture of the situation.
- Other times, certain business earns tremendous profits only at a certain period of time. Thus an annual turnover might be biased figure however taking into consideration quarterly or monthly amounts of turnover, a better and a logical conclusion can be drawn.
- Usually, the company, stakeholders and the general public take into consideration the company’s net profit for analyzing the companies well and the company’s position in the market instead of taking into consideration the annual turnover figure for drawing a conclusion about please health.
The different important points are as follows:
- Among the various points to be considered while calculating the company’s annual turnover one of the important things to be taken into consideration is that, the annual turnover is taken for a year, which may be a calendar year or a financial year.
- Another thing to be considered here is that there is a difference between turnover and profit of the company.
- Profit can be explained as the amount obtained after deduction of all the direct and indirect expenses along with the purchase, opening stock and other related costs from the turnover as well as after adding all the indirect incomes like interest, rent, dividend, profits from sales of capital assets, etc. This amount shows the cash generated from the whole trading operations and the entity’s ability to increase the wealth from the business
- While on the other hand, turnover shows us the raw figure which shows the gross sales of the business or the profession as explained above in the definition.
As explained above, the annual turnover is a figure of the companies, or mutual funds or and other professions which creates uniformity among the industries for comparison and benchmarking purposes with similar companies in the same industry.
Thus annual turnover is a mandatory figure for every company in the states to show the stakeholders and general public as per the International Financial Reporting Standards (IFRS) in their financial statements, both for a current financial year and preceding financial year and in certain cases, even the opening balance of preceding financial year.
This has been a guide to the Annual Turnover and its meaning. Here we discuss the formula for calculation of annual turnover along with an example, advantages, and disadvantages. You can learn more from the following articles –